Shenzhen Inovance Earnings: Automation, EV Outlook, and Execution Shine in China Slowdown

We retain our fair value estimate of CNY 64 per share for narrow-moat-rated Shenzhen Inovance 300124 in the absence of both material model and company target changes. Our base case on long-term electric vehicle sales growth near 30% CAGR fueled by both content growth and EV shipments is unchanged. The stock is trading at 30 times 2024 P/E. Inovance is fairly valued in our view, but there are chances of overshoot if government stimulus restores confidence in corporate investments, lifting the outlook for general automation.

Inovance’s second-quarter results are on track to meet our full-year projections. Revenue grew 36.5% year over year to CNY 7.67 billion, while gross margin fell 1.8% to 36.1%. The changes in revenue and gross margin are attributable to the increase in less-profitable EV component sales, which doubled year over year. As the numbers are of little surprise, and management affirms its targets of 20%-40% revenue growth and 10%-30% GAAP profit growth for 2023, we make only minor changes to our model.

The strong results are a stark contrast to ailing capital spending in China. We believe Inovance’s outperformance is fueled by a combination of factors: an ongoing localization push, especially in industries where state-controlled entities dominate like petroleum; EV-related revenue (especially non-Chinese automakers) grew faster than we thought to offset slightly slower automation momentum; and the company’s comprehensive product portfolio and competitive prices make it the one-stop choice when customers upgrade their production lines.

We think Inovance can prolong its high growth beyond next year as there are still multiple sectors in heavy industry that are dominated by global players like Siemens and ABB even in China.